GST registration restored as retrospective cancellation was held arbitrary for lack of reasons and mechanical exercise of power

Case Reference

EM Power Engineering Private Limited v. Central Board of Indirect Taxes and Customs & Ors.
Delhi High Court
W.P.(C) 2339/2024
Category of Dispute: GST Registration – Retrospective Cancellation
Date of Judgment: 16 February 2024
Relevant Provisions: Section 29(2) of the CGST Act, 2017; Rule 23 of the CGST Rules, 2017

Facts

The petitioner, a private limited company engaged in business since 2014, was initially registered under the DVAT Act and thereafter migrated to GST. A show cause notice dated 11.02.2021 was issued proposing cancellation of GST registration on the ground of non-filing of returns for a continuous period of six months. Pursuant thereto, an order dated 19.04.2021 was passed cancelling the GST registration retrospectively with effect from 01.07.2017. The petitioner challenged both the show cause notice and the cancellation order as being vague, contradictory, and devoid of reasons, particularly insofar as retrospective cancellation was concerned (paras 1–5).

Questions

Whether GST registration can be cancelled retrospectively under Section 29(2) of the CGST Act without recording objective reasons and without demonstrating why such retrospective effect is warranted, especially when the taxpayer was compliant during part of the period sought to be nullified (paras 6, 13).

Observations

The Court noted that neither the show cause notice nor the cancellation order disclosed any cogent reasoning for invoking retrospective cancellation. The show cause notice merely reproduced a statutory phrase regarding non-filing of returns, without particulars or justification. The cancellation order was found to be internally contradictory, simultaneously referring to a reply filed by the petitioner and yet alleging non-submission of reply, while also reflecting nil demand in the annexed table (paras 4–6).

The Court emphasised that although Section 29(2) permits retrospective cancellation, such power cannot be exercised mechanically or as a matter of course. The satisfaction of the proper officer must be founded on objective criteria, and mere non-filing of returns for a certain period does not automatically justify nullifying the registration for earlier compliant periods. The Court further observed that retrospective cancellation has serious civil consequences, including denial of input tax credit to the recipients of the taxpayer’s supplies, which mandates a heightened duty to record reasons and apply mind (paras 13–15).

Judgment

Allowing the writ petition, the Delhi High Court set aside both the show cause notice dated 11.02.2021 and the cancellation order dated 19.04.2021. The Court held that the impugned actions were unsustainable in law due to absence of reasons and arbitrary invocation of retrospective effect. The GST registration of the petitioner was ordered to be restored, subject to compliance with Rule 23 of the CGST Rules, 2017, including filing of pending returns and payment of tax, if any, within 30 days. The Court clarified that the authorities remain at liberty to initiate recovery proceedings in accordance with law, if dues are otherwise payable (paras 16–18).

Cases Referred – Summary Table

Between Fine Lines – Trade & Industry Takeaway

This judgment reinforces that retrospective cancellation of GST registration is an exceptional power, not a routine administrative tool. Taxpayers and officers alike must recognise that cancelling registration from inception can unsettle completed transactions and deny input tax credit downstream, and therefore demands explicit reasoning and proportionality. For industry, the ruling provides strong grounds to challenge vague and mechanical cancellation orders that seek to erase compliant periods retrospectively.

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